Personal pensions vs. SIPPs – which is best?
Most employed people plan their retirement through workplace pensions. It’s a different matter for the self-employed, contractors, or people running their businesses. They need to do it themselves. But now comes the next dilemma – are personal pensions or a Self-Invested Personal Pension (SIPP) the best option?
The personal pension
Much like a workplace pension, a personal pension is like the cruise ship of the pension world. You step onboard, someone hands you a cocktail (metaphorically), and you sit back and relax as the professionals handle everything.
You’ll be asked to choose a risk level for your pension fund, a contribution level and a retirement date.
You won’t have to worry about bonds and equities. This is because your pension provider will do all that for you. The downside? It’s pretty hands-off. You might feel a little frustrated that you don’t have more control over how your pension is managed if you have a specific vision for life after work, especially if you are looking to retire early.
Pros of choosing personal pensions
- Hands-off approach
- You don’t need to be seasoned investor
- Less effort on your part
Are there any drawbacks?
- Less control over how your money is invested
- You’re at the mercy of the pension provider’s decisions
- You’re the passenger as opposed to the driver
SIPPs: The “do it yourself” pension
By contrast, the pension is equivalent to owning a motorboat. With a SIPP, you have much more choice and control over how your pension money is invested.
Whilst you’re the captain of your financial ship, you’d still need a decent amount of knowledge to steer it. Do you want to invest responsibly or are you more interested in more fashionable stocks and shares?
A SIPP is for those who want to get into the nitty-gritty of investing and want to be involved in the investment strategy.
Advantages of SIPPs
- Greater control over your investments
- The potential for greater returns, if you know what you’re doing
- More kudos when speaking to your friends and colleagues
Factors to consider
- You’ll need some knowledge about investing
- More time-consuming than a personal pension
- More prone to investor mistakes
Personal pensions vs. SIPPs – the verdict
So, which one is right for you?
If you’re the type who wants to sit back, enjoy the ride, and not worry too much about where your money’s going, personal pensions may be your best bet. It’s the financial equivalent of picking a nice, relaxing spa day where someone else does the hard work.
If however, you’re the adventurous investor who enjoys a little risk, thinks of investing as fun and wants to take control over your investment choices, then the SIPP might be the way to go.
But be warned: just like driving a motorboat, running a SIPP requires a certain level of expertise, and if you’re not careful, you could end up making costly mistakes and hitting the rocks.
Our advice?
For either option, seeking pension advice from an independent financial advisor is a wise choice. For a reasonable cost, they will help you navigate the options and make the right choices.
Frequently asked questions
Keen to expand your knowledge on this topic?
Read through our selection of FAQs to help you get to grips with SIPP and personal pensions.
What’s better for long-term savings: a personal pension or a SIPP?
Choosing between a personal pension or a SIPP depends on how much control you want. A personal pension offers professional fund management with minimal effort, while a SIPP allows you to choose your investments. SIPPs may suit experienced investors looking for greater flexibility and potentially higher returns over the long term.
Should I choose a personal pension or a SIPP if I’m self-employed?
If you’re self-employed, a personal pension or a SIPP can help you build retirement savings. A personal pension offers simplicity and professional management, while a SIPP gives you full control over investment decisions. Your choice should depend on your confidence in investing and how involved you want to be.
Are personal pensions or SIPPs more suitable for beginners?
A personal pension is generally more suitable for beginners because it’s managed by professionals, and requires little investment knowledge. A SIPP, while flexible, involves more responsibility and decision-making. Those new to retirement planning may prefer the ease and reassurance of a personal pension when starting.
What’s the difference between a SIPP and a standard pension?
A SIPP (Self-Invested Personal Pension) gives you complete control over where your pension is invested, including shares, funds, and property. A standard pension, such as a personal pension, is managed by a provider who invests on your behalf. SIPPs suit confident investors; standard pensions suit those seeking simplicity.
How do personal pensions and SIPPs impact retirement planning?
Personal pensions and SIPPs play different roles in retirement planning. Personal pensions offer a low-maintenance route to building a pension pot, ideal for hands-off investors. SIPPs are better suited to those actively involved in financial planning who want to align their pension with a bespoke investment strategy.
Can I switch from a personal pension to a SIPP later in life?
Yes, it’s possible to transfer funds from a personal pension to a SIPP if you later decide you want more investment control. Many high earners begin with a personal pension and switch to a SIPP as their knowledge and interest in investment management grows. Always seek financial advice before transferring.
Helpful resources about pensions
Check your State Pension forecast (GOV.UK
Pensions & retirement (Money Helper)
